January 2023 Market Update – Construction Liability
Conditions for contractors in relation Construction Liability has improved somewhat during 2022 but continues to provide challenges in certain sectors. Some insurers remain of the view that construction contractors are not a desirable sector after a decade of unprofitable underwriting performance. There remains very little appetite from local markets in certain sectors (particularly residential high-rise development). In other sectors this trend is beginning to reverse with project home builders and renovators generally seeing steady renewal outcomes.
Given the long tail nature of this class of business (where claims are often not incurred for many years after the period of insurance expires) any, remediation taken by insurers in the past few years in terms of price, increased excesses or coverage restrictions will not bear fruit for several years. Worker to worker claims (which commonly only appear 4 to 5 years following the incident) continue to impact claims frequency. See our article “Why worker to Worker Claims are on the rise”. Premium and excess structures for contractors for these claims continue to increase. The difficulty of insurers defending such matters is the cause of the concern, and if an Insured can demonstrate good record keeping, safe methods of work, demonstrated incident response and streamlined claim processes it will improve renewal outcomes.
Mid-market contractors have experienced premium uplifts over the past 3 years, and for the second part of 2022 this has eased, and we experienced much more stable pricing though insurers still continue to seek moderate increases. It is important to ensure competitive tension in the negotiation process to ensure best possible terms are received and avoid insurers “rolling the arm” in respect of cover and pricing.
Smaller contractors continue to see more moderate premium increases on renewal, however there is a trend for insurers to apply higher deductibles to manage costs of claims. The insurance market has noticed trending that suggests smaller contractors can be more exposed to larger claims. This is particularly evident where they don’t have access to OH&S resources that may exist in larger firms and where they are bound by contractual conditions imposed upon them upstream by larger more sophisticated principals or head contractors– particularly in the commercial space. That said capacity is much more plentiful for smaller contractors, with established and emerging underwriting agencies more willing to support clients with a turnover of less than $50M – creating greater competition for that business.
Insurers continue to request, and comprehensively review, policyholders’ contract documents (both upstream and downstream). In doing so, they are scrutinising detrimental contracting provisions. Policyholders with poor contract administration processes and those who provide ‘no-fault’ indemnities or otherwise prejudice defence/recovery of claims, will face policy limitations to reduce insurers’ exposure to such indemnities. Where a policyholder can demonstrate good contracting regimes insurers will look upon this favourably. Insurers are moving away from offering blanket contractual liability cover except where rigorous risk management is embedded in the organisation.
Clients in this sector should ensure they are reviewing any contracts (with input from legal advisors) that they intend to execute. The broker’s input to ensure compliance with insurance provisions and advice to which there are uninsured (or uninsurable) exposures is critical. This is particularly relevant as insurers have been amending their base wordings to reduce covers which were automatically included during softer market conditions.
Particular attention should be paid to the inclusion of principals as “joint named insureds” and exclusion of proportionate liability or blanket indemnities which could see a claim rejected by an insurer. Contracts with principals are generally becoming more onerous and need to be more heavily negotiated prior to acceptance. Further commentary is provided in our series of articles on commercial contracts and insurance which can be found here.
We note from contract reviews we have undertaken that several risks seeking to be transferred by upstream parties will not be provided by a general liability policy. Cyber/ privacy and environmental risk are now being transferred to contractors by principals, with a general liability policy not providing adequate protection. Contractors need to be aware of the risk they are carrying by accepting indemnities in relation to data breaches resulting in loss of client data, and environmental clean-up costs.
Trade contractors, particularly plumbers, remain hard to place with no easing of pressure likely in the short term. There has been increased frequency in water damage claims. Many of these claims are from failed crimping or product defects. Fire services contractors have also experienced uplift as a result of water damage claims in the sector. Scaffolders are also seen as undesirable with most needing to place their liability business in the London market due to a lack of capacity available locally. Given recent large claims in this sector we would expect appetite to deteriorate further for scaffolding contractors.
Insureds who have poor loss ratios over the past 5 years will be “claims rated” and should expect premium / excess uplifts. If the losses appear to be a result of poor work processes or defective workmanship the market has little appetite to support this at any price. Insureds will need to be willing to negotiate increased excess structures or reductions in cover to mitigate against significant premium uplifts.
Whilst there is no doubt that this sector has been experiencing a significant correction in terms and conditions offered, there has been signs of improved conditions on the horizon in the past 6 months. We expect to see pricing moderate over 2023, and while premium rate increases may still be experienced, there are unlikely to be significant unexpected premium uplift for contractors during their next renewal period.
Whilst ensuring a competitive renewal process, negotiations with your current insurer are likely to yield the best result, particularly where the relationship is long standing and claims experience over the period has been favourable. Alternative markets are likely to improve outcomes where current insurers internal underwriting appetite has changed, or where the incumbent insurer has paid significant losses and is seeking to issue unpalatable terms which constitute a “soft decline”. In such cases it is worthwhile having detailed information in lessons learned and how losses will be mitigated in the future.
As always, in order to avoid surprises, it is essential to provide detailed information and clarification to potential markets to differentiate risk and ensure the best possible terms and conditions of cover are obtained. Due to increased workloads of insurers in this space turnaround times have been poor, stretching to many weeks to get an initial position. It is imperative to engage with the market early to allow sufficient time for negotiation prior to your renewal date, to ensure the most favourable outcomes are achieved.
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